You should not trust your instincts, but check things out with an attorney before acting. Sometimes, it just takes a phone call.

A recent Wisconsin Law Journal article gives a good example. A mother got a loan from a bank which was guaranteed by her son. Later, in contemplation of bankruptcy, she stopped paying her creditors except the bank. By paying the bank, she thought she could reduce the amount her son would owe them on his guarantee. Unfortunately, that was not the result. Instead, the court ordered her son to pay an amount equal to the payments made by his mother to the bank in the year before filing for bankruptcy to the trustee in bankruptcy. The court deemed her payments to be a preferential payment in contravention of the general policy behind the Bankruptcy Code that all unsecured creditors are to be treated the same. Otherwise, her son would get the benefit of the payments and, therefore, be in a better position than the other unsecured creditors.

Trust protectors (aka Trust Advisors) have long been used in British Commonwealth countries, originating with offshore asset protection trusts. With these trusts, their role was limited mostly to overseeing the foreign trustee and to make sure the trust maker’s intent was fulfilled.

Today, trust protectors are increasingly being used with trusts that are located here in the U.S. And, while their main job is still to oversee the trustee and make sure your intentions are followed after unforeseen changes in the law and other matters, they can be given additional duties that will provide you and your beneficiaries with added flexibility, security and peace of mind.

What is a Trust Protector?

A trust protector is someone you name in your trust document to oversee your trustee and make sure your trust carries on in the way you intended. This should be a trusted friend or advisor, someone who knows and understands your motives, family values and desires when you created your trust. In the case of a trust that will last many years, like a multi-generational trust, a trust protector is often an institution rather than a specific person.

A trust protector can begin to act immediately (for example, if your trust is irrevocable), or can take an active role only under certain circumstances (for example, at your incapacity or death). Think of your trust protector as your substitute, someone who can speak for you if there is uncertainty in interpreting your trust’s instructions or the law changes and that change affects your trust. Your trust protector also can provide guidance for the trustee and protect your beneficiaries from a trustee that is not meeting its responsibilities, is overreaching, or is unresponsive.

How Much Power Should You Give Your Trust Protector?

The trust protector’s duties and powers are defined in the trust document, and can range from extremely limited to extremely broad. How much power you give your trust protector is completely up to you? Traditionally, the trust protector’s role has been a defensive one: to ensure that the trustee carries out the grantor’s wishes and to protect the beneficiaries from an under-performing or over-reaching trustee. But if you give your trust protector more power, the role can become a proactive one, allowing your trust protector to act before wrongs occur.

Some of the duties and powers you can give your trust protector include:

Oversee, Remove and Replace the Trustee

Your trust protector can oversee your trustee, providing guidance in interpreting your trust’s instructions and holding the trustee accountable. You can also give your trust protector the power to remove and replace the trustee. This authority can be restrictive, limited to specific bad behavior by the trustee that can include being unresponsive to the beneficiaries, not providing acceptable record-keeping, reporting and tax filings, or charging too much for services. The authority can also be extensive, allowing the trust protector to remove and replace the trustee for no specific reason (without cause). Usually potential replacements (successor trustees) are named in the trust document, but it may also be possible for the trust protector to select a successor trustee.

Just having these oversight provisions in place is often enough to keep a trustee in line. And if it does become necessary to remove a trustee, it is much easier for the trust protector to do this (because he or she already has the authority) than for the beneficiaries to reach an agreement and ask for court removal, which is a time-consuming, expensive and unpleasant procedure.

You can also allow your trust protector to control spending by the trustee, and even limit the trustee’s compensation, which can go a long way toward preventing disputes.

Resolve Disputes

You can also make your trust protector the mediator if disputes should arise between co-trustees, between the trustee and a beneficiary, or even among beneficiaries. Having the trust protector as the final arbiter in disputes over interpreting the provisions of the trust document can sometimes avoid costly and unpleasant trust litigation.

You could even give your trust protector the ability to sue or defend lawsuits involving the trust assets.

Modify Your Estate Plan

You may also want to allow your trust protector to actually make some changes to your trust. For example, you could allow your trust protector to change the situs (location in which the trust is regulated) to a state that has more favorable asset protection or income tax laws, should the need arise.

You could also give your trust protector the power to amend or revoke the trust agreement, in its entirety or in part; to add or delete specific beneficiaries or classes of beneficiaries; to change the terms of distributions to beneficiaries; even pour into another trust for the same beneficiaries, if your state allows that. These powers may be extremely beneficial to the trust’s ability to follow your intentions as tax laws change, as well as to protect the assets from potential predators and creditors.

Delegate Responsibilities among Advisors

Traditionally, and still with many trusts, the trustee handles everything – record-keeping, tax returns, distributions, investing, etc. But over time, people have discovered that it is beneficial to allocate some of this responsibility to different parties that have different strengths.

Consider giving your trust protector the ability to appoint, oversee and substitute other professionals. For example, the management of your trust could be divided like this:
• An Administrative Trustee maintains trust records, accounts, and tax returns. If the trust is governed by laws in a different state (often for tax or asset protection reasons), the administrator will usually be a local institution or professional.
• A Distribution Trustee or Adviser that has discretion and can make or withhold distributions from the trust to the beneficiaries. Typically this will be an objective third party, which insulates the trustee from pressure and liability associated with the power to distribute trust assets. This is especially important if a beneficiary’s creditor tries to force distributions from the trust.
• An Investment Trustee or Adviser oversees or directs trust investments, and may be granted specific powers, including: to hold, maintain or cancel life insurance; to direct the sale or exchange of property; and to open, manage and close accounts. A general trustee is held to the prudent investment standard because of its fiduciary duty and, as a result, has restrictions on the investments it can make. Having an investment advisor that is not bound by the prudent investor rule or held to the same standard will provide more flexibility in investments.
• The “General” Trustee handles everything that is not delegated.

Who Should Serve as Trust Protector?

Ideally, your trust protector should be someone who knows you, your motives, desires, and intentions when you established your trust. It cannot be you or a family member who is a beneficiary of your trust because of possible tax complications. An unrelated third party – a family friend, an advisor, the attorney who drafted your trust, or your family CPA – is often the best choice. They obviously must be willing to serve in this capacity, and your trust document should specify if they are to be paid for their services.

Planning Tip: There is currently very little case law on trust protectors, and they are not required by law to be fiduciaries, as trustees are. Your trust should clearly state whether you want your trust protector to act in a fiduciary capacity and be held to a higher standard, or not act in a fiduciary capacity.

Who Should Have the Power to Remove or Replace the Trust Protector?

This probably should not be you, unless the replacement is explicitly limited in the document to someone who is not related or subordinate to you. You could possibly give this power to the beneficiaries or an unrelated third party. Leaving this decision to the courts would be time-consuming and costly.

Planning Tip: If your plan has asset protection elements, no beneficiary should have the power to remove or replace the trust protector. Doing so could cause your trust to be under the control of a beneficiary and that could put the entire asset protection part of your plan in jeopardy.

Conclusion

The use of trust protectors is an excellent way to provide added flexibility, security and peace of mind in trust planning, especially since you can control how much power the trust protector is given. If you would like to discuss adding a trust protector to your estate planning, please call our office. We are ready to help.

Test Your Knowledge

1. Using a trust protector is a new concept in estate planning. True or False

2. A trust protector’s main job is to keep the beneficiaries in line. True or False

3. How much power you give your trust protector is up to you. True or False

4. A trust protector can only remove a trustee for very bad behavior. True or False

5. A trust protector is never permitted to make changes to the trust document. True or False

6. A trust protector is a good choice to be a mediator between the trustee and the beneficiaries. True or False

7. Your trust protector should be someone who knows and understands your motives, family values and desires when your trust is created. True or False

8. A trust protector can protect your beneficiaries from a trustee that is not meeting its responsibilities, is overreaching or is not being responsive. True or False

9. The trustee is required to handle all administrative and investment duties of your trust and can never delegate to others. True or False

The new tax law (2010 Tax Relief Act) creates an once-in-a-lifetime planning opportunity that ends at midnight, December 31, 2010.

Generally, transfers (greater than $13,000 per year) to generations younger than children are subject to what is known as the generation-skipping transfer tax (GSTT), an onerous tax equal to the maximum gift or estate tax rate. The purpose of this tax, enacted in the late 1980s, is to prevent wealthy individuals from transferring assets to younger generations for the purpose of avoiding application of the estate tax at every generation.

The 2010 Tax Relief Act creates a unique opportunity to make gifts through December 31, 2010 that are not subject to the generation-skipping transfer tax. This is because, under the new law, the tax rate is zero for any generation skipping transfer made in 2010. Beginning January 1, 2011, the tax rate for these transfers with be 35%. In two short years the rate goes back to 55%.

There are three common scenarios offering planning opportunities. First, make gifts before December 31, 2010 to Skip Trusts. These are trusts that you create for grandchildren, great grandchildren or more remote generations. There will be no generation skipping transfer tax. The gift tax is 35%, after use of the $1 million lifetime gift exclusion. This strategy is most effective for large taxable estates. On the gift tax return, you will want to elect out of automatic Generation Skipping Transfer (GST) allocation rules. For 2010, you will allocate nothing to the GST Exemption because there is no estate tax. Use a Trust Protector with the power to add beneficiaries (e.g. children/spouse).

The second planning scenario deals with the unique planning opportunities for those who are beneficiaries of trusts that will be subject to GSTT upon distribution from the trust. Distributions should be made from these trusts before December 31, 2010 because the tax rate is 0%. After this year, the distribution will be subject to at least a 35% tax rate. Sometimes, there is concern about beneficiaries getting outright distributions. Some of these concerns may be alleviated if the trustee invests trust assets in limited partnerships or limited liability companies (LLCs) and then distributes the partnership interests or LLC membership interests.

The third planning opportunity deals with clearing any loans made to trusts. The most common scenario involves Irrevocable Life Insurance Trusts. Until the passage of the 2010 Tax Relief Act, there was no way to allocate the GSTT exemption, so loans were used. With the new act, you can now allocate the GSTT exemption on a timely-filed gift tax return. If you unwind the loans now, you can save the 2010 annual exclusion that would otherwise be lost.

I strongly encourage you to take advantage of this rare gift from Congress and consider making transfers to generations younger than children, even if you do not yet have grandchildren. We can help you structure these gifts so that they meet your goals and objectives, regardless of amount.

The Eldercare Locator is a service of the U.S. Administration on Aging. It’s been around for nearly 20 years. Its toll free number is 800-677-1116. Its website is http://www.eldercare.gov. It provides information about long-term care alternatives, transportation options, caregiver issues and government benefit eligibility. This information is also available in Spanish and other languages. There is an extensive database of links, publications, and other resources.

In the last couple of weeks, a number of banks have announced moratoriums on foreclosures citing problems with their paperwork. Newly-named personnel, “robo-signers”, were under fire for not reviewing files and submitting false affidavits to courts. Even with years of experience representing banks and doing foreclosures, this was news to me. It was hardly clear what was going on.

Yesterday, The Wall Street Journal published an article that explains it and highlights the development of a new form of law practice, “foreclosure defense.” If your facing foreclosure, it matters who you hire to represent you. See the article by clicking on the following link:

Whether in the context of gift and estate tax planning or probate and trust administration, we have been talking with our clients about qualified disclaimers more than ever. It is an effective planning technique, but it must be implemented carefully. The biggest hurdle is that the person making the disclaimer cannot take any benefit from the property to be disclaimed.

Estates & Trusts is one of the leading magazines in this area. The following is a recent article on qualified disclaimers:

Qualified Disclaimers in 2010

Use this simple and unique solution to add flexibility in dealing with estate tax uncertainty

By Joe Luby, founder and manager of Jagen Investments, LLC in Henderson, Nev.

What a remarkable time to be in the business of advising wealthy families on financial, tax and estate issues! It’s remarkable both in terms of the changes and significant developments in the field, as well as for the opportunity afforded us as advisors to set ourselves apart and proactively solve client concerns. Many practitioners are hamstrung this year with indecision, worry and fear about what may or may not happen with income taxes, estate tax, generation-skipping transfer (GST) tax, etc. It’s unfortunate for their clients because we’re situated in the perfect tsunami of wealth transfer opportunities. Asset values are way down, tax rates are the lowest they’re going to be in most of our lifetimes and interest rates are near zero. Wealth transfer strategies should be on the top of advisors’ minds right now.

As of this writing, it doesn’t look like Congress will act anytime soon on estate tax reform legislation. Common expectations in the industry expect Congress to eventually enact some version of the law we had in 2009, perhaps with some minor variations. No one knows for sure, but that seems to be the consensus lately. One fear commonly expressed by practitioners nationwide is that Congress could try to enact retroactive legislation and thereby disrupt any transactions put in place today. For example, if they retroactively raised the gift tax to 45 percent or 55 percent from the current 35 percent, then gifts made today become more expensive. The same fear applies to a retroactive GST tax, which could create a double whammy for gifts made in 2010.

Simple Solution

There’s a simple but unique solution to these concerns: the qualified disclaimer (QD). In short, to be a QD under Internal Revenue Code Section 2518(b), the QD must:

be in writing; and

be made within nine months of the date of gift or the date the recipient reaches age 21, whichever is later.

Additionally, the recipient may not have accepted the gift, used the gifted asset(s) or benefited from them. The recipient may not direct where the gifted asset(s) goes upon receipt of the QD (that is, the gift either reverts back to the giver or to the next designated beneficiary, if applicable).

Most of us think of QDs for post-mortem planning opportunities. For example, the primary beneficiary of a retirement account may use a QD to redirect the funds to the contingent beneficiary for a variety of reasons. Or, a surviving spouse may use a QD for all or some of the assets in a disclaimer trust,” which specifically incorporates the QD as part of the upfront planning.

In 2010, clients can use QD planning for lifetime gifts to add flexibility and a solution to the issues described above. Taxable gifts made between now and Dec. 31 are subject to the current gift tax rate of 35 percent under 2010 law. If we wait to see whether Congress acts retroactively with an increased gift tax rate or GST tax, we will wait ourselves and clients right into 2011 when we know the rate is scheduled to go up. The time to act is NOW. Clients can use the QD procedure to undo the gift later, should Congress enact a retroactive tax increase.

Example

Take the following example: Tom Clark would like to gift $2 million of marketable securities to his son Bill. He establishes a trust naming Bill as primary beneficiary and his wife, Mary Clark as contingent. The trust is drafted to qualify as a completed gift for tax purposes, and Tom funds the trust with the $2 million securities portfolio. The family now has nine months (assuming Bill is age 21 or older) to decide if they want the gift to stand. Should Congress enact a retroactive increase in the gift tax, Bill will simply disclaim his interest in the trust, which then flows to Mary as contingent beneficiary. The entire transaction is gift tax-free if this option is triggered since the gift is now between spouses. And if the gift tax rate isn’t increased retroactively, the Clarks have locked in the lower gift tax rate by completing the transaction in 2010.

The same set of circumstances applies to gifts made to grandchildren in the event a retroactive GST is enacted. Grandparents can use this opportunity to shift significant wealth using the reduced gift tax rate in effect for 2010 and no GST tax, while still retaining flexibility in their planning if necessary to undo the gift.

Additional opportunities are present when using QD planning this year as well. Assume Congress doesn’t act retroactively and thus the current 2010 gift tax rate of 35 percent applies. However, Tom’s $2 million portfolio suffers significant losses and drops significantly. The QD option allows the family to reconsider whether paying the gift tax on $2 million (even at the lower rate in 2010) is really the best strategy. It may make sense to undo the gift via QD and structure a new gift of the now devalued assets, even though the nominal tax rate may be higher in 2011. If the assets are depressed in value already due to market turmoil over the last few years, the reverse may apply. If the $2 million portfolio recovers significantly in value, the family wins by having locked in the gift now in 2010 at the lower value and reduced gift tax rate.

Discounted Value Assets

Lastly, any gifting strategy using QDs can be greatly enhanced with the use of discounted value assets. The net after-tax impact of the gifting strategies described above is even higher when the asset gifted is subject to valuation adjustments. Examples of such assets are fractional real estate interests, closely held business interests and private investment funds. For example, an asset subject to a 30 percent discount results in a net effective federal gift tax rate on the full asset value of less than 25 percent. So not only can the client lock in 2010’s lower gift tax rate with the flexibility to undo the transaction later, but also he can even reduce the effective rate via proper advanced planning.

I came across a column from Regina Brett, a columnist for the Plain Dealer in Cleveland, OH. To celebrate growing older, she wrote a list of lessons that life has taught her. I thought I would share a few of them here:

Life isn’t fair, but it’s still good.

When in doubt, just take the next small step.

Life is too short to waste time hating anyone.

Your job won’t take care of you when you are sick. Your friends and parents will. Stay in touch.

Pay off your credit cards every month.

You don’t have to win every argument. Agree to disagree.

Save for retirement starting with your first paycheck.

Make peace with your past so it won’t screw up the present.

Don’t compare yourself to others. You have no idea what their journey is all about.

Get rid of everything that isn’t useful, beautiful or joyful.

When it comes to going after what you love in life, don’t take no for an answer.

Burn the candles, use the nice sheets, wear the fancy lingerie. Don’t save it for a special occasion. Today is special.

Over prepare, then go with the flow.

No one is in charge of your happiness but you.

Forgive everyone everything.

Time heals almost everything. Give time time.

However good or bad a situation is, it will change.

Don’t take yourself so seriously. No one else does.

All that truly matters in the end is that you loved.

If we all threw our problems in a pile and saw everyone else’s, we’d grab ours back.

I have heard, all to frequently, about people losing Medicare coverage for skilled nursing care because it had been determined that they had reached a “healing plateau.” That is, they were not improving from the skilled nursing care they were receiving (and would not improve from additional skilled care) and, therefore, were deemed to be only receiving “custodial care”, not the skilled nursing services required for Medicare benefits.

While that may have been the standard in the past, it is not the standard today, but it still comes up. As it did recently, when a federal judge ruled against the Social Security Administration and rejected “Improvement” as a criterion for continuing Medicare skilled nursing facility (SNF) coverage. Here is a summary of the case.

A federal district ruled that an administrative law judge (ALJ) with the U. S. Centers for Medicare & Medicaid Services (CMS) improperly denied Medicare benefits to a patient in a skilled nursing facility. The ALJ had concluded that “[i]t became apparent that no matter how much more therapy the Beneficiary received, she was not going to achieve a higher level of function.”

After undergoing hip replacement surgery on April 28, 2008, Mary Beth Papciak, 81, developed a urinary tract infection and was readmitted to the hospital. On June 3, 2008, Ms. Papciak was discharged by Dr. Tuchinda to ManorCare to receive skilled nursing care, physical therapy and occupational therapy. Upon Ms. Papciak’s admission to ManorCare, Ms. Papciak was unable to ambulate and could not use her walker due to numbness of her hands due to what was later diagnosed as carpal tunnel syndrome. Ms. Papciak also had a history of cellulitis, anemia, cholecystectomy, chronic atrial fibrillation, hypertension, anxiety and depression.

Ms. Papciak received therapy five days a week; however, she made slow progress during her stay. Her therapy included physical and occupational therapy, treatment, self care, therapeutic exercises and therapeutic activities. Her initial treatment was primarily for ambulation. Medicare paid for the skilled care Ms. Papciak received from June 3 through July 9, 2008. It was determined, however, that effective July 10, 2008, Ms. Papciak no longer needed skilled care because Ms. Papciak had made only minimal progress in some areas, had regressed in other areas, and had been determined to have met her maximum potential for her physical and occupational therapy. As a result, Medicare denied payment from July 10 through July 19 because Ms. Papciak was only receiving “custodial care,” not the skilled nursing services required for Medicare coverage.

Ms. Papciak appealed the decision denying coverage, and her appeal worked its way up the chain to an administrative law judge, which upheld the denial, which was then upheld by CMS’s Medicare Appeal Counsel (MAC). After exhausting her administrative remedies, Ms. Papciak sought relief in federal district court.

The federal district court sided with Ms. Papciak. The proper legal standard to be applied to a patient entitled to Medicare benefits in a skilled nursing facility is whether the patient needs skilled services to enable her to maintain her level of functioning.

In the CMS Medicare Skilled Nursing Facility Manual which sets forth the standard to be applied, the reviewing authorities must give consideration to a patient’s need for skilled nursing care in order to maintain her level of functioning. The relevant portion reads: “The services must be provided with the expectation, based on the assessment made by the physician of the patient’s restoration potential, that the condition of the patient will improve materially in a reasonable and generally predictable period of time, or the services must be necessary for the establishment of a safe and effective maintenance program.”

Neither the ALJ nor the MAC addressed Ms. Papciak’s need for skilled nursing care in order to maintain her level of functioning. This was error, held federal Magistrate Judge Cathy Bissoon, requiring that the decision to deny her benefits be overturned.

The ALJ had concluded that “[i]t became apparent that no matter how much more therapy the Beneficiary received, she was not going to achieve a higher level of function.” Similarly, the MAC stated that “[d]espite the appellant’s arguments to the contrary, the enrollee made little or no progress in therapy from the time of her admission to ManorCare through her discharge from skilled care on or around July 10, 2008.”

This is a common misunderstanding about Medicare’s skilled nursing facility benefit, that the patient must be showing “progress” in order for Medicare to pay for her care. Indeed, federal regulations state that “[t]he restoration potential of a patient is not the deciding factor in determining whether skilled services are needed. Even if full recovery or medical improvement is not possible, a patient may need skilled services to prevent further deterioration or preserve current capabilities.”

What happened to Ms. Papciak? She was hospitalized again, discharged to a different skilled nursing facility, where she received physical and occupational therapy under the Medicare benefit, and was discharged home on August 21, 2008.

No one has ever lost a penny on bank deposits insured by the Federal Deposit Insurance Corporation (FDIC), but there is a little-known hazard of having money in a failing bank.

Recently the Maritime Savings Bank (based in West Allis, Wis.) was closed by regulators and taken over by North Shore Bank. Depositors were informed that the interest rates on their CDs had been slashed. For some, that meant the interest on a CD that doesn’t mature until next spring will be paying about 0.5% instead of the 3.05% they signed up for a couple of years ago.

Many people are unaware that this is typical when the deposits and assets of a failed bank are sold by the FDIC to a strong institution. Although banks and regulators often remind consumers that FDIC-insured deposits are safe, the promised future earnings on a yet-to-mature CD at a failed bank are not guaranteed. (The ability of an acquiring bank to unilaterally cut interest rates applies only to deposits, not loans.)

Consumers are free to withdraw their money without incurring a penalty, but in today’s low-interest environment it may be hard to find higher CD rates. In part, that’s because many banks that get in financial trouble try to attract money by offering CD rates that are better than the local competition.

In a decision stemming from the savings-and-loan crisis in the late 1980s, the federal government allows banks that acquire failed competitors to lower the interest rates. At that time many institutions that were doomed to fail boosted their CD rates in an attempt to bring in more deposits and stay afloat. When they failed anyway, the FDIC was left with a bigger and more-costly mess to clean up.

Reducing the rates on CDs makes the acquisition more affordable for a bank that steps in. It also makes it more likely that the FDIC will be able to find a strong institution willing to take over an insolvent bank.

If you are interested in more details about this story, read the complete article found on jsonline.com.

In the coming year, seniors will see some of the biggest changes to Medicare Part D since the prescription benefit became available in 2006. More than 17 million are enrolled in private drug plans offered through Medicare.

The program’s benefits will improve for those who land in the program’s prescription drug coverage gap, the so-called donut hole. It has been announced that the nation’s pharmaceutical manufacturers will provide 50 percent discounts on the cost of the covered brand-name prescription drugs for beneficiaries in the Medicare Part D coverage gap starting in 2011.

Benefits of the Affordable Care Act for seniors include the provisions in the law that help fight fraud and make certain preventive care and annual wellness exams remain free for most Medicare beneficiaries.

The average 2011 Medicare prescription drug plan premium will remain similar to rates beneficiaries are currently paying – an increase of $1. Most Medicare prescription drug plan premiums will remain stable next year and beneficiaries will find there are clearer plan options, including many plans that can help them save even more. They will find that the Affordable Care Act improves the value of drug coverage they get next year.